When faced with overwhelming credit card debt, as many of us are in this recessionary era, we’re awash with options on how to deal with the debt: handle it on our own; try debt settlement; obtain a debt consolidation loan; file for bankruptcy; tap home equity, or join a debt management program through a credit counseling agency.
Each approach has advantages and disadvantages. Here we’ll clarify what’s entailed in a debt management program.
What is it?
A debt management plans are also commonly referred to as “debt management programs,” “DMPs,” and “debt repayment programs.”
First a person with unmanageable credit card debt seeks credit counseling at a consumer credit counseling service. A counselor obtains an itemized list of the client’s monthly expenses and income. If a client has funds remaining in the budget, but can’t keep up with minimum payments, debt management becomes a possibility.
A debt management plan is a personalized, structured repayment program wherein you pay back 100% of your debt over time, a maximum of 60 months. You pay down the principal much faster than you could on you own and make one monthly payment to the credit counseling agency which electronically distributes the money to your creditors.
A good credit counselor will review the status of your creditors—tracking the name of the credit grantor, the account number and current interest rate. Then the counselor will look up how much each creditor would charge in interest were you to join the program (policies between creditors vary greatly). A counselor can tell you how you could save in interest over the long term and your shortened payoff time.
What are the benefits?
Lower interest rates, late and over-limit fees.
By joining a debt management program, you show you wish to back your debt. In exchange, most creditors make concessions to the original agreement to help their customers repay their debt and avoid a potential bankruptcy. Reduced interest rates and waived late and/or over-limit fees are the main appeal.
Decrease the payoff time.
As a result of paying reduced interest and fees, more of your monthly payment is directed to pay off your principal, allowing you to shorten the duration of your payoffs.
Eliminate calls from collectors.
Clients who are well behind on their bills are often hounded by collections agencies. Such calls will continue for about the first 90 days of the program (while the credit grantors process credit counselor proposals). During this period, you may tell collectors that you’ve joined a DMP and refer them to your agency’s Customer Service Department. Once the 90-day period has past, creditors will stop contacting you.
Once you regain control with a manageable action plan, your stress is greatly reduced. The uncertainty of how you are going to handle a large financial problem causes undue worry and tension. A reputable credit counseling service will encourage free follow-up visits with your counselor. Should you have questions about your budget or credit, or your circumstances change, having access to a financial specialist reduces anxiety.
Make just one monthly payment.
As a convenience, credit counselors consolidate your payments into one monthly installment that’s divided and sent electronically to each creditor. Usually set up as an automatic withdrawal from a bank (more…)